Royal Dutch Shell (LSE:RDSB) recently released an updated outlook for its fourth quarter 2020. Shares fell approximately 6% around the time of the release. Management had earlier provided a Q4 outlook, in the third quarter when they had much less visibility.
Given the share price movement, I decided to take a closer look. Here’s more on the update and what I think it means for Royal Dutch Shell shares.
Updated outlook
Although many things are different, here are two key differences I identified between management’s previous and updated Q4 outlooks.
|
|
Updated Q4 Outlook |
Previous Q4 Outlook |
|
Integrated gas production (in thousands of barrels of oil equivalent per day) |
900–940 |
830–870 |
|
Upstream production (in thousands of boe/d) |
2,275–2,350 |
2,300–2,500 |
It looks to me like management is possibly becoming more optimistic about integrated gas production but also softening the guidance range for upstream production for the fourth quarter.
Because upstream still matters for a company like RDSB, I reckon some short-term investors might have sold some shares as a result of that more pessimistic upstream guidance.
What I think the update means for Royal Dutch Shell shares
While management updated their guidance and Royal Dutch Shell shares fell, I don’t know that the updated Q4 guidance really matters all that much for shares in the long term.
Although stronger upstream production guidance could have helped, I reckon the company’s stock price depends a lot more on the long-term price of oil rather than on quarterly production fluctuations.
If long-term oil prices rise even modestly, I can see how RDSB could easily recover the 6% retreat. In terms of just how much the company is affected by oil, management estimates their cash flow from operations sensitivity is around $6bn per year for each $10 per barrel price movement in Brent.
Is the stock a buy?
I think my appetite for RDSB stock will depend a lot on how management transitions into a greener future.
The oil giants will certainly face challenges in terms of their transition into a greener future. However, I still believe the market is underestimating RDSB. While it might not be as profitable as it was before, the company has immense financial resources and leading R&D capabilities. Given that Royal Dutch Shell isn’t paying as much in dividends as it could, I believe management can also use M&A to speed up the transition. With the right execution and enough time to transition, the company could still be a good investment.
As for what I think will happen this year, it’s my belief there is reason for cautious optimism. If the world does a good job of manufacturing and distributing Covid-19 vaccines, there is potential for economic growth to beat expectations. If oil prices outperform because economic growth substantially exceeds estimates, there is potential for RDSB to outperform too.
Given its fair valuation, I’d buy and hold Royal Dutch Shell shares.